Why Comparing Investing to Gambling is Wrong and Why It Is Right

5 minute read | by Jules Buxbaum

Investing is buying the fruits of production. An entrepreneur has a vision for a product or service. If all goes well, customers will pay more for the product or service than it costs to deliver. Value is created. Typically, the entrepreneur needs investors to provide capital to produce the product. Before investors offer the capital, they must become convinced that the venture will succeed. Becoming convinced involves analysis, contemplation and vision. Investors who do this well are rewarded more often than not. The opposite is true for investors who are poor at evaluating business opportunities. Skill is involved. Importantly, no one needs to lose for the investor to win.

Gambling is fundamentally different. While having skill improves your chance of winning at many games (blackjack is a good example), other games (like roulette and slots), are pure games of chance. All gambling is a zero sum game. For every winner there is a loser. No value is created, except perhaps the enjoyment from playing the game. Success in investing is associated with creating value. Success in gambling is associated with taking money from the other guy. The creation of value is a fundamental difference between investing and gambling. As a society, we should celebrate successful investors and be indifferent to successful gamblers.

Luck is involved in both investing and gambling. No matter how good the potential, many business ventures fail. No matter how good the poker player's skill, if the cards don't come, the hand will lose. Luck, perhaps a lot of luck, is required to win at gambling and investing. This is the sense in which investing is like gambling. Uncertainty is critical for both activities and managing the uncertainty is a key to success.